Currency Crisis, Monetary Policy and Corporate Balance Sheet Vulnerabilities
AbstractThis paper studies how the exposure of a country's corporate sector to interest rate and exchange rate changes affects the probability of a currency crisis.To analyze this question, we present a model that defines currency crisis as situations in which the costs of maintaining a fixed exchange rate exceed the costs of abandonment.The results show that a higher exposure to interest rate changes increaes the probability of crisis through an increased need for output loss compensation and an increased efficacy of monetary policy in stimulating output.A higher exposure to exchange rate changes also increases the need for output loss compensation.However, it lowers the efficacy of monetary policy in stimulating output through the adverse balance sheet effects of exchange rate depreciation.As a result, its effects on the probability of crisis is ambiguous.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2005-113.
Date of creation: 2005
Date of revision:
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Web page: http://center.uvt.nl
currency; financial crisis; monetary policy; foreign debt; balance sheets; short term debt;
Other versions of this item:
- Eijffinger, S.C.W. & Goderis, B.V.G., 2007. "Currency crises, monetary policy and corporate balance sheet vulnerabilities," Open Access publications from Tilburg University urn:nbn:nl:ui:12-195451, Tilburg University.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-12-01 (All new papers)
- NEP-FMK-2005-12-01 (Financial Markets)
- NEP-MAC-2005-12-01 (Macroeconomics)
- NEP-MON-2005-12-01 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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CEPR Discussion Papers
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- Eijffinger, Sylvester C W & Goderis, Benedikt, 2007.
"The Effect of Monetary Policy on Exchange Rates During Currency Crises: The Role of Debt, Institutions and Financial Openness,"
CEPR Discussion Papers
6217, C.E.P.R. Discussion Papers.
- Sylvester C. W. Eijffinger & Benedikt Goderis, 2008. "The Effect of Monetary Policy on Exchange Rates during Currency Crises: the Role of Debt, Institutions, and Financial Openness," Review of International Economics, Wiley Blackwell, vol. 16(3), pages 559-575, 08.
- Eijffinger, S.C.W. & Goderis, B.V.G., 2008. "The effect of monetary policy on exchange rates during currency crises: The role of debt, institutions and financial openness," Open Access publications from Tilburg University urn:nbn:nl:ui:12-376137, Tilburg University.
- Eijffinger, S.C.W. & Goderis, B.V.G., 2007. "The Effect of Monetary Policy on Exchange Rates During Currency Crises: The Role of Debt, Institutions and Financial Openness," Discussion Paper 2007-18, Tilburg University, Center for Economic Research.
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